Tories eye changes to income-splitting promise for Canadian families

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The Conservative government is weighing changes to its key income-splitting promise that would respond to critics who say the tax cut would mostly benefit well-off Canadians.

Conservative sources say the notion of capping access to the tax cut so that it is less available to higher-income Canadians is under consideration as the government debates how to deliver tax relief with expected future budget surpluses. In the process, it would aim to fulfill the first and biggest promise Prime Minister Stephen Harper made during the 2011 election campaign.

(What is income-splitting? Read The Globe's easy explanation)

The change would respond to critics who say income splitting will provide a big gain to high-income Canadians while offering relatively little to the middle class. Sources say the government is also trying to lower the potential cost of the promise, which could exceed more than $3-billion a year in lost tax revenue if implemented as promised. While no final decisions have been made, they say, the government is looking at a range of options such as phasing in the pledge so that it initially only applies to parents with young children.

In March, 2011, appearing with his wife, Laureen, and a smiling family on the front porch of a suburban Victoria home, Mr. Harper promised a Family Tax Cut that would start once the federal deficit is erased.

The Conservative election platform said parents with children under 18 would be allowed to split up to $50,000 in income for tax purposes. It also said 1.8-million Canadian families would benefit, with an average savings of $1,300 a family.

The underlying message was that for families wanting to have one parent stay home with the kids, the Conservatives had a plan.

Nearly four years later, balanced books are on the horizon and Finance Minister Joe Oliver is promising that details on tax cuts will come in his fall economic update. Liberal Leader Justin Trudeau said over the weekend that he would reverse any new income-splitting pledge, while NDP Leader Thomas Mulcair recently said his priority if elected would be a new national daycare program. The government must decide how to respond to criticisms of income splitting from groups like the C.D. Howe Institute, without upsetting Conservative MPs who strongly support the pledge as initially promised.

"Almost all of us want this," one Conservative MP said. "I haven't taken a survey, but I'm pretty sure that it's nearly unanimous."

Tax expert Jack Mintz, with the University of Calgary's School of Public Policy, has been the most vocal academic champion of income splitting.

"I like the idea of establishing neutrality so that people can choose whether they want to be at home to raise their children or to go to work and put their kids in child care, and the tax system shouldn't interfere in that decision," he said in an interview. Dr. Mintz has watched the policy debate unfold since 2011 and expects changes are afoot.

"I would say that the proposal that was originally in the last campaign, we won't be seeing that specific proposal," he said.

Dr. Mintz has argued in writing that several technical changes could be made to shift the benefits more toward middle-income earners.

The critics remain unconvinced.

"You take what I would call a flaky concept and proposal and dress it up … It's still flaky," said Rhys Kesselman, who holds the Canada Research Chair in Public Finance at Simon Fraser University. Dr. Kesselman co-athored a 2011 paper for the C.D. Howe Institute with the institute's Alexandre Laurin. Their report found 40 per cent of total benefits from the tax cut would go to families with incomes above $125,000 a year – with some high-income families receiving a tax cut of more than $6,400. The report also found that 85 per cent of all households – including single parents – would gain nothing from the policy.

Some of those arguments have won over Steve Wellburn, a tax accountant who hosted the Prime Minister for the 2011 front-porch event unveiling the tax-cut promise.

In an interview, Mr. Wellburn said he expects to vote for the Conservative Party, but no longer believes income splitting is the best way to help Canadian families, particularly given the limited benefit it would provide to two-income families.

"I know that the initial plan of income splitting for families – while personally for us it would be great – it probably has less appeal overall for Canada given the situation that most families find themselves in," he said. "I think implementation, as they've thought about it more, is not as straightforward as they probably had hoped."

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